The wood or the trees?

Commerce ministry needs to re-examine its premises

The commerce ministry has been characterised by interlocutors from many countries as being uniquely obstructionist in forums for global as well as regional trade negotiations (e.g. the proposed Regional Comprehensive Economic Partnership pact among the leading economies of Australasia). The ministry is also seen as dragging its feet in finalising free trade agreements with groupings such as the European Union. Somewhat belatedly, the ministry has come out in its defence through media interactions and public commentary. The essence of the ministry's position is that India happens to be among the most open trading nations in the world, judging by the ratio of trade in goods and services to the gross domestic product (GDP). This is said to be 49 per cent for India, a figure higher than for China, the US and other large as well as regional economies.

Further, it has been contended that other countries which already have most of their trade covered in the ambit of multilateral trade agreements, and with negligible or zero tariffs, have little or nothing to offer in return for any concessions that India might make in these areas. India on its part is constrained in what it can offer by way of tariff concessions because of the potential loss of customs revenue, which would hit fiscal balances. Where other countries do have room for manoeuvre, as in reducing agricultural subsidies, they are unwilling to offer any concessions. Nor are they willing to match India's offers when it comes to trade in services (especially movement of professionals - important for the infotech industry) and in the area of foreign investment - where India has opened up substantially in recent years.

To sum up, the counter-narrative is that India is willing to deal across a broad front, but other countries are selective in their approach and focus, and therefore unable to match India's offers - even as they flout accepted norms of trade conduct. To this is added the argument that Indian business is ambiguous about the net benefit of free trade agreements (FTAs). A review is being conducted of all such agreements, and India may have little to gain from any more such agreements - especially since the counter-parties with which India has the maximum trade (the EU, US and China) are not covered by FTAs.

These arguments deserve to be considered on their merits, but it is necessary first to check the initial assumptions and assess the implications of the conclusions reached by the ministry. The statistical claim that India's ratio of trade in goods and services to GDP is higher than for most countries may be mathematically correct but is misleading for more than one reason. India's defensiveness is on opening up trade in goods - and here the ratio of trade to GDP is lower than for all the large economies of Europe barring France, all the leading economies of Asia barring Japan, the economies of North America other than the US, and lower than for other large economies like Turkey. This is not the hallmark of an open trading system. Further, a good bit of the country's trade in goods is accounted for by the import of energy (oil, coal and gas); such imports of essential inputs are no indicator of openness to the rest of the world. If one separates energy from the total goods trade, it will be seen that India's ratio to GDP is nothing to write home about. In other words, India is an outlier and needs to open up - especially since the country's average tariff level (said to be about 13.5 per cent) is significantly higher than for almost all the major trading nations.

Finally, the notion that India does not need FTAs flies in the face of the global trend towards regional and supra-regional trading blocs being created. The danger of a negative approach lies in the risk of getting excluded from markets, where other countries that are part of trading blocs gain preferential access. The ministry may well be right in some of the claims it makes with regard to specific negotiating positions. It is right also to emphasise that the country's negotiating elbow-room is limited by the absence of domestic reform that would make Indian producers more competitive, and by a currency policy that ignores trade realities. Nevertheless, the ministry needs to re-examine its premises and end-positions.